The IRS has more options for taxpayers who respond than for taxpayers it has to chase. Nearly all of them require you to make the first move.
File the return even if you cannot pay. The failure-to-file penalty runs at 5% per month, against 0.5% for failure to pay. Filing on time and owing money is a far smaller problem than not filing at all.
Short-Term Payment Plan: 180 Days, No Setup Fee
If you can pay the balance within 180 days, this is the simplest path. There is no setup fee, whether you apply online, by phone, or by mail. Individuals qualify if they owe less than $100,000 in combined tax, penalties, and interest.
Penalties and interest continue to accrue until you pay the balance, so this works best when you know money is coming: a bonus, a closing, a receivable, a seasonal upswing in the business.
Long-Term Installment Agreement: Monthly Payments
For balances that will take longer than 180 days, you want an installment agreement. Individuals can apply online if they owe $50,000 or less in combined tax, penalties, and interest and have filed all required returns. At that level the IRS generally does not ask for a financial statement.
Setup fees depend on how you apply and how you pay:
- Direct debit, applied for online: $22
- Direct debit, applied for by phone, mail, or in person: $107
- Non-direct-debit, applied for online: $69
- Non-direct-debit, applied for by phone, mail, or in person: $178
- Low-income taxpayers: the fee is waived for direct debit agreements, or $43 otherwise, which may be reimbursed
Direct debit is worth choosing for more than the lower fee. A missed payment can put the agreement at risk, and automatic withdrawal reduces the chance of forgetting a due date. You still need enough money in the account, and you must stay current on future filings and payments.
Filing on time also reduces the failure-to-pay penalty once an installment agreement is in effect. If you filed the return by the deadline, including extensions, the penalty drops from 0.5% per month to 0.25% for every month the agreement stays in effect. File late and you pay the full rate. Interest continues either way.
If you owe more than $50,000 or cannot afford the standard monthly payment, the IRS may require a collection information statement and supporting financial records before approving another type of agreement. Depending on the taxpayer and the debt, that may involve Form 433-F, Form 433-A, Form 433-B, or Form 433-H. The IRS then evaluates your income, allowable living expenses, assets, and ability to pay. The accuracy of that financial statement directly affects the monthly payment it approves.
Currently Not Collectible: Hardship Status
If paying the IRS would leave you unable to cover basic living expenses, the agency can place your account in Currently Not Collectible status. The IRS generally suspends active collection efforts, including new bank and wage levies.
The debt does not go away. Penalties and interest keep accruing, and the IRS may still file a Notice of Federal Tax Lien or apply your future refunds to the balance. The agency reviews your financial condition periodically and resumes collection if your situation improves.
The IRS generally has ten years from the assessment date to collect a tax debt, and time spent in Currently Not Collectible status ordinarily counts toward that period. The calculation is not always straightforward. Bankruptcy, appeals, installment agreement requests, Offers in Compromise, and other events can suspend or extend the deadline, and separate tax periods can carry separate expiration dates. Confirm collection statute dates from IRS transcripts before assuming a balance is close to expiring.
Offer in Compromise: Settling a Balance for Less Than the Full Amount
An Offer in Compromise settles the debt for less than the full amount. It is the option people hear about on late-night radio ads, and it is also the one most often misrepresented. The IRS accepts an offer when the amount represents the most it can reasonably expect to collect. It is not a negotiation over what feels fair.
The application requires Form 656 along with Form 433-A (OIC) for individuals or 433-B (OIC) for businesses. It also requires a $205 application fee and an initial payment, neither of which is refundable. If the IRS rejects the offer, it applies your offer payments to what you owe and keeps the application fee. Low-Income Certification waives both.
You must have filed all required returns and be current on estimated payments to be eligible. An open bankruptcy disqualifies you outright until it is discharged and closed. The process can last many months. The IRS generally has up to 24 months to make a determination, excluding certain periods such as an appeal.
Acceptance carries its own terms. The IRS keeps any refund, including interest, on liabilities through the date it accepts the offer, and you cannot roll that overpayment into next year's estimated taxes. You must then remain current on filing and payment obligations for five years from the acceptance date, including valid extensions. If the offer defaults, the IRS may reinstate the original liability, less payments and credits already received, along with applicable penalties and interest.
Many rejected offers had problems that could have been identified before the application was submitted. Running the numbers honestly first is the difference between a resolution and a wasted $205 plus months of waiting. If an offer is rejected, you have 30 days from the date on the rejection letter to appeal.
Responding Can Temporarily Stop a Levy
Requesting a payment plan changes what the IRS can do to you while it decides. With limited exceptions, the agency is generally prohibited from levying against your wages or bank accounts during four windows: while it considers your request, for as long as an approved plan stays in effect, for 30 days after it rejects or terminates a plan, and throughout a timely appeal of that decision.
That protection is one of the strongest reasons to contact the IRS before collection activity escalates. It applies only once you have asked.
Know Which Option Fits Before You Apply
These options are not interchangeable. The right one depends on what you owe, what you earn, what you own, and how much time is left on the collection statute. Applying for the wrong one costs money and months.
Jim O'Callaghan, CPA, works with individuals and business owners across Queens and Long Island who owe the IRS more than they can pay. That means pulling transcripts, confirming the actual balance and collection statute dates, and identifying which resolution the numbers support before you file anything.
Phone: 718-326-0500 (Glendale) | 631-673-0617 (Melville)
Email: info@taxmasterinc.com
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